When we were in school, we often faced a situation where our pen ink ran out or we forgot our pens at home. What do we do at that time? We simply ask for a Pen from our friend, which is often termed as Borrowing. However, this “borrowing” is interest-free. You don’t necessarily give a treat, or pay them in cash while returning the Pen. You just greet them with a warm thank you!
The loan is quite similar. When we need a large amount of money for various purposes, we tend to turn our thoughts towards applying for a loan. It is often said that a financially successful person knows when to apply for a loan- when it is a good solution to the problem they are facing. However, it can be said that Loans can trouble you when you cannot necessarily afford to pay them back, along with the Interest amount.
It is considered that Bank Loans are safe as compared to other ways of securing a loan amount. Let us understand what Bank Loans are!
Bank Loans, like any other Loan, are financial assistance that the Bank provides to its customer. Banks lend you money, which you are expected to repay along with a fixed interest rate. One of the primary functions of the Banks is Advancing Loans.
The deposits that the bank receives from its customers are not kept idle in the Bank. They usually keep a certain cash amount reserved and lend out the remaining amount, in the form of Loans. The main source of income for the Bank is the interest on these loans.
Whenever a Bank provides a customer with a Loan, banks make them sign the Loan Agreement. This agreement tells everything about the customers’ loan preferences along with their signatures, making the exchange official and legal.
The agreement also includes the following important terms:
Collateral can be said as a backup for the Bank. Whenever a borrower fails to repay their loan amount, along with the Interest amount, the Bank tends to cease the Collateral provided by the borrower. It is said to be a security for the loan one is applying for.
It is the amount that the lender charges along with the Principal Amount. An interest amount is usually charged from the borrowers for the use of any kind of assets- vehicles, property, cash, etc.
It is the amount that one borrows from the Bank (or, any other institution).
It is the section of the agreement that deals with the repayment periods of the Bank Loan. The repayment is done over time, with a certain portion of the Principal Amount and Interest rate.
With these, there are a few additional terms which you must know about. These are:
The rate at which the Banks accept deposits from the borrowers is known as the Borrowing rate.
The rate at which the investors receive the reserves of the Bank is known as the Lending rate.
The difference between these two rates is known as Spread. Spread is the profit earned by the Banks.
The different types of Bank Loans available in India are classified into two categories-
Secured loans include:
Unsecured Loans include:
Bank Loans/Loans play an important role in managing the expenses of an individual, in times of need. Loans are not only provided to an individual, but also to various institutions, organizations, the government sector, and business corporations. These loans help in increasing the Money Supply of both the Lender and the Borrowers. Loans are classified into two categories- Secured Loans and Unsecured Loans. The main difference between these two categories is the Collateral requirement. Under these two categories, different types of loans are included- which are of utmost help to the Borrowers.
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